The Special Economic Zone is areas notified by Central Government under the SEZ Act. This Act has been framed to provide a comprehensive framework for establishment, operations and sustainability of the Special Economic Zones in the State. This Policy will have overbearing powers over existing State Policies on issues provided in the Act for issues and areas not covered by the SEZ framework, the prevailing State Framework & legislation will be deemed to be in force. The said Act although presented in 2005 was made effective on 10th February, 2006. Therefore, it applies to all the activities undertaken in relation to Special Economic Zone unit after 10th February, 2006. The salient features with regards to service tax contained in the Act are discussed in this article.

Overriding provision

Section 51 of the Act reads as follows:

"The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act”. Thus if in any other Act the provisions contained are inconsistent with the provisions contained in this Act, the provisions contained in this Act will prevail over the provisions contained in other Act. In brief, it can be stated as regards operation of Special Economic Zone, the provisions contained in SEZ Act will prevail over the provisions contained in other Act

Section 26 of the Act provides for Special provisions relating to exemption, drawbacks and concessions to every developer and unit holder

It provides that every developer and unit holder shall be entitled to the exemption from payment of excise duty, duty of custom and service tax which is levied under Chapter V of the Finance Act, 1994. The service provider providing taxable services provided to a developer to carry on the authorized operation in Special Economic Zone is not required to pay service tax. Every person intending to develop the Special Economic Zone is required to make application to the State Government for in principal approval. Thereafter the application is sent to Finance Ministry in Central Government for the purpose of notifying the area as a Special Economic Zone under section 4 of the Act. The Special Economic Zone comes into existence only after the notification is issued under section 4. All the benefits provided under the Act are applicable to the Special Economic Zone only after the same has been notified. Thus if any developer has availed the taxable service of any person prior to date of notification, the service provider cannot claim the benefit provided under this Act. The service tax will be payable on the services which are received by the developer prior to the date of notification.

Developer to obtain approval for services

As per rule 10 of the Special Economic Zone of 2006, the approval Committee permits the procurement of goods and services to carry on the authorized operation. As per rule 9, the developer shall submit to the board the detail of operation to be undertaken in Special Economic Zone for obtaining the authorization. The approval granted in rule 9 indicates the nature of operation authorized by board. The approval of list of goods and services is to ensure the utility of these goods and services in carrying the authorized operation. The benefit under the Act and the rules made thereunder can be claimed only in respect of services approved under
rule 10.

Rule 31 of the Special Economic Zone of the Rules, 2006

It provides exemption from payment of service tax on taxable services rendered to a developer or a unit holder by any service provider, for the authorized operation in Special Economic Zone. The authorized operation means the operation authorized under rule 9 of the Special Economic Zone rules. There is dispute whether the service must be consumed (as provided in notification 4/04-ST) in Special Economic Zone area in order to claim exemption from payment of service tax. It has been consistently held by Tribunal and other higher courts that the interpretation of the statute must be made to achieve the objective of the statute. The larger bench of Hon’ble Tribunal recently in the case of GTC reported in 2008 TIOL 1634 has while interpreting the definition of input service given under the CENVAT Credit Rule, 2004 observed as follows:

We have considered the submission. We find that it is well settled that every clause of the statute should be construed with reference to the context in which it is issued. A bare mechanical interpretation of words and application of legislative intent is devoid of concept and purpose will reduce most of the remedial and beneficial legislations to futility. To be literal in meaning is to see the skin and miss the soul. The legislature never wastes its words or says anything in vain and a construction which attributes redundancy to legislation will not be accepted, as has been observed by the Supreme Court in the case of Union of India vs. Hansoli Devi 2002 7 SCC 273. A similar observation was made by the Apex court in the case of Peerless Finance (supra).

It is thus, clear that all the provisions in any Act must be read objectively. As per section 53 of Act, the area notified as Special Economic Zone is considered area outside the country and therefore, the provisions of goods or services from DTA to SEZ is considered as export of goods or services. Therefore, even if services are not consumed in SEZ but are provided for the carrying out the authorized operation the same will not be charged to the service tax under section 66 of the Chapter V of the Finance Act, 1994.

For example, Say “X” unit is located in SEZ and it wants to import product “z”. He retains custom agent say “A” for the purpose of clearing the imported goods in to SEZ. The goods are cleared for the purpose of manufacture of finished goods stated in approval letter of the board. Services of say “Mr. A” CHA is provided for carrying out the authorized operation of a unit located in SEZ. Therefore, CHA will not be liable for payment of service tax.

The provision of service by DTA is considered as export of services

Section 2 (m) define the word export as follows:

“export” means –

1. taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or

2. Supplying goods, or providing services, from the Domestic Tariff Area to a unit or developer; or

3. Supplying goods, or providing services, from one unit to another unit or developer, in the same or different Special Economic Zone;

It is evident from the definition given in clause (ii) that supply of goods or providing service from Domestic Tariff Area to all the unit or developer of SEZ is considered as an export of goods or service. The Central Board of Excise and Custom has vide circular No. 29/2006 dated 27th December, 2006 has clarified that the clearance of goods to SEZ will be considered as an export of goods. Therefore, the provisions of Rules 18 and 19 of Central Excise Rule, 2002 will be applicable to dispatch of goods to SEZ.

It is thus clear that the goods sent to SEZ are considered as export of goods. Similarly services provided to SEZ or to the Developer is also considered as export of service. The export of Service Rule 2005 framed under section 93 and 94 of the Chapter V of the Finance Act, 1994 inter alia provides that the consideration for rendering the services must be received in Foreign Convertible Currency. However, there is no such condition existing in the SEZ Act or the rules made thereunder. The provisions relating to receipt of consideration in Foreign Convertible Currency is therefore, inconsistent with the provisions contained in SEZ Act. Due to operation of section 51 the provision of SEZ Act will prevail and therefore the services provided from DTA to SEZ will be considered as an export of service. Similarly, the provisions of service from SEZ to DTA would be considered as import of service and service tax will be payable.

Conclusion

It can be stated that SEZ Act has been framed with a very good objective of providing all the provisions applicable to unit at one place. The unit holder does not have to look for various provisions in the different Acts in order to smoothly run the business. However, teething problem always remains. It is felt that Central Board of Excise and Custom shall clarify the various points in this regards at the earliest.

Article by CA. S. S. Gupta, a renowed chartered accountant having expertise in Service Tax